Facing a backlash from local builders and the threat of legal action, city officials in Boulder, Colo., are re-examining their claim that local builders owe millions in unpaid taxes. At stake is a potential revenue windfall for the city of between $1.9 million and $5.2 million, which contractors could be liable for.

The controversy began last summer when a city audit revealed a discrepancy between projected and actual revenue from construction use taxes, which are assessed when a building permit is issued. According to city finance manager Bob Eichem, the shortfall resulted because builders hadn’t reconciled estimated with actual project costs and paid...

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